Closing Recap

Tuesday, June 14, 2022

Equity Market Recap

·     After falling 4-straight days coming Tuesday, U.S. stock markets chopped around most of the day, fell to fresh lows late afternoon (S&P about 100-points off overnight highs), but ended with a late day bounce ahead of tomorrow’s FOMC monetary policy meeting. The Fed is expected to ramp up its fight on inflation with anywhere from 50-75 bps hike on the table, as calls for more aggressive action had increased in recent days following higher inflation readings. Defensive sectors saw the biggest drawdowns today, with utilities, REITs, Healthcare, and handful of Consumer Staples dragging markets lower, while Energy and Financials outperformed initially before sliding late day as well. The S&P 500 remains in “bear market” territory, or more than 20% from highs with no relief over the last month. Commodity prices slumped late day as oil reversed to the downside along with weakness in gold (1-month lows) as the dollar hit fresh 20-year highs and Treasury yields hit highest levels in over a decade. CNBC noted that the biggest market risks, as per Bank America global fund manager survey, are: 1) hawkish central banks at 32%, global recession at 25%, inflation at 22%, systemic credit event at 9% and the Russia/Ukraine conflict at 6% (a month and a half ago was the biggest concern). Oil prices marching higher again, with brent topping $125 per barrel to highest level since early March. More calls for 75 bps rate hike as Goldman Sachs revised their FOMC forecast to include 75bp hikes in June and July, followed by 50bp hike in September and 25bp hikes in November and December, for an unchanged rate of 3.25-3.5%. Individual stock news has taken a back seat to the larger macro picture.

Economic Data:

·     Producer Price Index (PPI) m/m for May rises +0.8%, in-line with est. +0.8% while headline PPI on y/y basis jumps +10.8% vs. est. +10.9%. On a core basis, or ex food & energy, PPI rose +0.5% vs. est. +0.6% m/m and rose +8.3% (which was lowest since Nov ’21) vs. est. +8.6% y/y.

Commodities

·     Natural gas prices plunged after Freeport LNG said its Gulf Coast export facility, one of the largest in the U.S. (and provides about 20% of U.S. LNG processing), will take at least three months to resume partial operations after an explosion last week. The delay from the earlier estimate of a three-week downtime has raised the risk of gas shortages in Europe and led to a 16% drop in U.S. Henry Hub natural gas futures to $7.22 per million British Thermal Units

·     Oil prices reversed off 3-month highs, as WTI crude falls -$2.00 or 1.65% to settle at $118.93 per barrel after touching highs of $123.68 earlier. Commodity prices sunk with the dollar and Treasury yields rising ahead of the FOMC meeting. Weekly inventory data coming up tonight (API) and tomorrow (EIA) as global tight supply has been aggravated by a drop in exports from Libya amid a political crisis that has hit output and ports.

·     Gold prices slide along with other precious and industrial metals, falling sharply this week thus far ahead of the FOMC meeting tomorrow where rate hikes are widely anticipated. August gold prices slip -$18.30 or 1% to settle at $1,813.50 an ounce, falling to its lowest levels in more than a month.

Currencies & Treasuries

·     Treasury yields opened the day lower, but quickly found upside momentum with the 10-yr above 3.46% (up 9 bps) while 2-yr rises another 14 bps to 3.42%, building on yesterday’s incredible moves that saw the 2-yr jump 30-bps on rising expectations of an aggressive rate hike by the FOMC tomorrow (possibly 75-bps). Bets have been made into tomorrow’s FOMC meeting where expectations are now leaning toward a more aggressive 75-bps hike instead of the 50-bps markets were looking for just a few days ago. The change comes after the “hotter” CPI inflation report last Friday showing prices had not peaked, hitting new 40-year highs, though today’s PPI report was slightly “tamer” than expected. Note the U.S. bond market is on pace for its worst year in history with a loss of 12.1%. This is 4x larger than the previous worst year in 1994 (-2.9%)

·     The U.S. dollar setting new 20-year highs as the dollar index (DXY) rose to 105.45, gaining against most rival currencies on bets the Fed will aggressively raise rates tomorrow and forecast for more aggressive hikes in future meetings to combat inflation. The British Pound falls below $1.20 for first time since March 2020. The euro back to 1.04 into the Fed.

Sector News Breakdown

Consumer

·     Retailers; ANF hosted its investor day today, setting a long-term annual sales goal of $5 billion, with an operating margin rate goal at or above 10%. By 2025, the retailer expects to hit annual revenue of $4.1 billion to $4.3 billion with an operating margin rate at or above 8%; BBY downgraded to Neutral from Buy at Bank America as increasing uncertainty around 2023 earnings makes valuation look incrementally less attractive and upgrade TSCO to Buy from Neutral as expect consumables such as pet and animal feed and home/vehicle maintenance essentials to earn a higher share of wallet among rural consumers; in mattress retailers, Piper said its May Mattress Retailer Survey showed a disappointing decline of -15%, representing a notable y/y deterioration from April at -10%, lowering ests on LEG and SNBR; POOL shares dropped after a Jefferies proprietary B2B survey of Pool builders showed 75% of respondents indicated that they expect demand to be flat or down once current backlogs were depleted

·     Auto sector: RACE is expected to comment on its electrification strategy and provide a business update for the coming years at its much-anticipated capital markets day on Thursday; TWI said it sees full-year adjusted EBITDA $225M-$240M to be "the strongest performance in history" and sees 2Q sales "at or exceeding" 1Q sales, "while margins are expected to be stronger"; BLNK said it will buy SemaConnect, which provides charging infrastructure in North America, for $200M; Ford (F) said it was recalling 48,924 U.S. Mustang Mach-e EVs because of potential for power loss

·     Consumer Staples: product names such as CL (down 8^th straight day), CLX sharply lower; KAVL rises after announced it reached an agreement with Philip Morris Products, or PMPSA, a wholly owned affiliate of PM, for the development and distribution of electronic nicotine delivery system; BGS upgraded from Underweight to Neutral at Piper, as further downside risk now looks more modest than it has been and believe current pricing is likely adequate to drive margin recovery; COTY reaffirms its outlook for both 4Q22 and FY22; PM said it now expects ‘better’ core performance (ex-Russia/Ukraine) for Q2, including a less favorable timing impact related to cigarette shipments; KO said it has delayed plans for an estimated $3 billion initial public offering (IPO) of its African bottling unit to 2023

Energy

·     Energy stock movers: Energy was abroad outperformer as oil prices hit best levels since early March; Output among the 13 countries that make up OPEC dropped by 176,000 barrels a day last month to average roughly 28.5 million barrels, data from the cartel released showed. The declines came as protesters closed major oil refineries in OPEC-member Libya, where output fell by 186,000 barrels a day. Other members also had output contract, with Nigeria’s output falling by 45,000 barrels a day and Iraq’s output dropping by 21,000 barrels a day. The declines outweighed more modest supply increases from Saudi Arabia, UAE, and Kuwait.

·     E&P and Majors; CLR announces receipt of "take private" proposal from Hamm family in deal for $70.00 per share/says Board intends to establish a special committee consisting of independent directors of board to consider proposal https://on.mktw.net/3Qk7LPA ; SLCA upgraded from In Line to Outperform at Evercore/ISI with $20 tgt with shares down 27% since their April 30 downgrade; natural gas prices plunged after an incident occurred at the Freeport LNG liquefaction plant on Quintana Island, Texas that resulted in the release of LNG, leading to the formation and ignition of a natural gas vapor cloud, and subsequent fire at the facility.

·     Refiners: PBF upgraded to Overweight from Equal Weight at Wells Fargo and raise tgt to $57 noting crack spreads at/near record levels, crude/feedstock supplies sufficient, and said demand resilient. Firm said for the entire sector, higher 2022 EPS estimates and PTs reflect increased earnings/CFFO partly offset by lower 2022 refining EBITDA multiples.

·     Utilities & Solar; defensive utilities among the top laggards in the S&P 500 index, with hefty declines for AWK, PNW, PPL, CNP and others; NEE raised its expectations for adj. EPS for 2022, 2023, 2024 and 2025 which is now seen in the range of $2.80 to $2.90, $2.98 to $3.13, $3.23 to $3.43, and $3.45 to $3.70, respectively.

Financials

·     Bank movers: pocket of strength early for banks and insurers ahead of the widely anticipated FOMC rate hike tomorrow, with 50-bps a lock at this point and fed fund futures now showing a strong likelihood of a 75-bps hike to fight inflation; Commercial real estate banks BWB, HMST, NYCB, FBC, PEBO downgraded from Buy to Neutral at B Riley; in real estate, RDFN said today it is asking about 8% of our employees to leave the co today saying with May demand 17% below expectations, they don’t have enough work for our agents and support staff; COMP plans to cut about 10% of its workforce as the housing market starts to cool from its pandemic frenzy

·     Brokers & Asset managers: SCHW May total client assets $7.30t, -1.4% y/y, Core net new assets brought to the company by new and existing clients totaled $32.8 billion; HOOD PT cut from $11 to $7, reit Underweight at JPMorgan saying in flat market in May Robinhood clients were down 900bps and margin balances also fell for the month by 20% to $4.2B; LPLA said total advisory and brokerage assets at the end of May were approximately $1.12 trillion, an increase of $24.6 billion, or 2.2%, compared to the end of April 2022. Total net new assets for May were $24.8 billion, translating to a 27.2% annualized growth rate.

·     Bitcoin news: COIN falls initially as bitcoin and ethereum hit lowest 18-month lows (Bitcoin overnight low of $20,834), was downgraded to Neutral from OW at JPMorgan, and the company also announced an 18% reduction in workforce (by about 1,100 jobs); other Bitcoin leveraged stock names (miners, investors, banks) such as MSTR, MARA, RIOT, SI, SBNY saw early weakness before bouncing off lows following its recent sell-off

Healthcare

·     Biotech & Pharma: UBS several assumption/initiation of coverage with a sell and $9 tgt on VTRS, a Buy and $75 tgt on ITCI, a Neutral and $7 tgt on CHRS, a Neutral and $10 tgt on TEVA, a Buy and $194 tgt on JAZZ, and AZN downgraded from Buy to Neutral saying on the back of impressive trial results for Lynparza and Enhertu, AZN has outperformed the global large cap peer group by 120bps this year; MRNA’s COVID-19 vaccine may pose a higher risk of heart inflammation than PFE in shot some age groups, the U.S. CDC said but the findings on myocarditis and pericarditis, were not consistent across all the U.S. vaccine safety monitoring systems

·     Healthcare Services & MedTech Equipment; RMD agreed to acquire German health software company MediFox Dan Holding for ~$1B including debt; OM halted shipments on its Tablo Hemodialysis System for home use and suspended guidance for the year; MITO said the FDA has granted a meeting request to discuss elamipretide, co’s experimental therapy for treatment of an ultra-rare genetic condition called Barth Syndrome; EYE will replace REGI in the S&P 600 prior to open June 16^th; HSIC among top decliners in the S&P after analyst downgrade June dental survey shows modest slowing for patient volumes

Industrials & Materials

·     Housing, Industrial, & Machinery; Mortgage rates have hit 6% after a sharp selloff in the mortgage securities market, a development that could further slow the housing market. Rocket Mortgage is showing on its website a 6.25% interest rate for 30-year fixed-rate mortgages for the purchase of new homes

·     Transports; FDX surged after announced a series of long-planned business and corporate governance actions consistent with efforts to drive long-term value creation for all stakeholders, including a dividend increase and new board members; Canadian rails CNI and CP added as catalyst call Buys at Deutsche Bank; for truckers (LSTR ), KeyBanc said their proprietary spot rate index was again below typical seasonal variations last week, while the Market Demand Index continues to move lower, potentially signaling further weakness

·     Metals & Materials; DOW files mixed securities shelf; Akzo Nobel (AKZOF) warned on Q2 citing lockdowns in China and weak demand for decorative paints in EU; CC downgraded to Neutral from Buy at Bank America with a price target of $44 down from $48 and downgraded HUN to Underperform and cut tgt to $34 from $45 noting as the demand function slows, they are seeing pricing power top out across most commodity chemicals – this is true for fertilizers, MDI, PVC, TiO2, PE, siloxanes, acrylics, epoxies, etc.; AA shares extend decline as aluminum prices fell 1% to $2,599 a tonne after dropping 1.9% on Monday and hitting its lowest since Dec. 15.

Technology, Media & Telecom

·     Internet & Media movers: NFLX downgraded to Sell at Benchmark with $157 tgt, admittedly after having prematurely upgraded the stock to Hold following 4Q21 earnings; Theinformation reported that NFLX executives in recent weeks have met with representatives of both ROKU and CMCSA to discuss arrangements under which those companies would handle either the ad sales or the technical infrastructure for Netflix’s forthcoming ad-supported tier of service; DIS shares down an 8th straight session in overall weak media sector

·     Software movers; ORCL shares jumped following quarterly results as 4Q adj EPS $1.54 topped the est. $1.37 on revs $11.8B above est. $11.66B, cloud revs $2.9B – Cloud license and on-premises license revs +18% Y/Y to $2.54B, Hardware revenue fell -2.9% Y/Y to $856M; in video games (ATVI ) NPD data group said consumer spending across video game hardware, content and accessories in the United States fell 19% year-on-year to $3.7B which is the lowest monthly spending since February 2020

·     Hardware, Components & Services; NTAP upgraded to Buy in IT Hardware at Deutsche bank as see compelling risk-reward at the current levels, and downgrades HPE to Hold as expect the stock to trade sideways on cautious IT spending – Buy rated names in the sector are AAPL, DELL, NTAP and PSTG but says is more cautious on demand; NOK upgraded to Buy from Neutral at Citigroup with a EUR 6.50 price target saying the company’s improving fundamentals are being largely ignored by the market and the mobile infrastructure market is showing strong momentum